NOTE 8 – FEDERAL INCOME TAXES

The consolidated income tax expense (benefit) is as follows:


	2013		2012		2011
Current expense (benefit)	$	0	$	0	$	0
Deferred expense (benefit)		8,092,000		5,636,000		0
Valuation allowance – change in estimate		0		0		(27,361,000	)

Tax expense (benefit)	$	8,092,000	$	5,636,000	$	(27,361,000	)

2011 reflects the reversal of the valuation allowance, which was established in 2009, related to a change in estimate about our ability to realize our net deferred tax assets in future years based on a change in circumstances.

A reconciliation of the differences between the federal income tax expense (benefit) recorded and the amount computed by applying the federal statutory rate to income before income taxes is as follows:


	2013			2012			2011
Tax at statutory rate (35%)	$	8,794,000		$	6,360,000		$	3,543,000
Increase (decrease) from
Tax-exempt interest		(347,000	)		(486,000	)		(595,000	)
Bank owned life insurance		(465,000	)		(535,000	)		(622,000	)
Change in valuation allowance		0			0			(29,640,000	)
Other		110,000			297,000			(47,000	)

Tax expense (benefit)	$	8,092,000		$	5,636,000		$	(27,361,000	)

Significant components of deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:


	2013		2012
Deferred income tax assets
Allowance for loan losses	$	7,987,000	$	10,037,000
Net operating loss carryforward		4,050,000		8,235,000
Unrealized loss on securities		2,908,000		0
Tax credit carryforwards		1,397,000		1,198,000
Nonaccrual loan interest income		605,000		892,000
Deferred compensation		567,000		506,000
Deferred loan fees		273,000		229,000
Fair value write-downs on foreclosed properties		241,000		2,124,000
Fair value of interest rate swap		92,000		390,000
Contributions carryforwards		0		256,000
Other		343,000		369,000

		18,463,000		24,236,000
Deferred income tax liabilities
Depreciation		419,000		491,000
Prepaid expenses		192,000		339,000
Unrealized gain on securities		0		1,278,000
Other		98,000		113,000

		709,000		2,221,000

Total net deferred tax asset	$	17,754,000	$	22,015,000

At December 31, 2013, we had carryforwards of the following tax attributes: gross federal net operating loss of $11.9 million that expires in years 2030 through 2031; general business tax credits of $0.5 million that expire in the years 2028 through 2033; and $0.9 million of federal alternative minimum tax credits with an indefinite life. $0.3 million of the gross federal net operating loss relates to unrealized excess benefits on stock-based compensation for which a tax benefit will be recorded to shareholders’ equity when utilized.

Accounting guidance requires us to assess whether a valuation allowance should be carried against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified. During 2011, we returned to pre-tax profitability for four consecutive quarters. Additionally, we experienced lower provision expense, continued declines in nonperforming assets and problem asset administration costs, a higher net interest margin, further strengthening of our regulatory capital ratios, and additional reductions in wholesale funding. Our analysis of the positive and negative evidence led us to conclude that, as of December 31, 2011, it was more likely than not that we had returned to sustainable profitability in amounts sufficient to allow for realization of our deferred tax assets in future years.

Consequently, in 2011 we reversed the valuation allowance that we had previously determined necessary to carry against our entire net deferred tax asset as of December 31, 2010 and 2009. $27.4 million of our December 31, 2010 valuation allowance was reversed due to this change in judgment and the remaining $2.2 million was reduced due to the tax effects of our 2011 pre-tax income.

At December 31, 2013, the positive evidence, including that cited above, continues to outweigh any negative evidence and, therefore, we continue to believe it is more likely than not that we will be able to realize all of our deferred tax assets in future years.

We had no unrecognized tax benefits at any time during 2013 or 2012 and do not anticipate any significant increase in unrecognized tax benefits during 2014. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals existed at any time during 2013 or 2012. Our U.S. federal income tax returns are no longer subject to examination for all years before 2010.